Three weeks ago, the ruler of Dubai, Sheikh Mohammed bin
Rashid al-Maktoum told his critics to "shut up" and asserted that his
emirate was on top of its financial problems, having stated earlier in the year
that he had made no mistakes. Last week, his son, the crown prince, told
investors and journalists that the emirate's economy was "humming along
nicely" and the chairman of one of Dubai's biggest property developers
claimed that the emirate would still enjoy a growth rate of 5% this year. Together
these men had created an elaborate Potemkin village: by juggling their figures,
they were sending out signals that Dubai could weather the storm.

When news broke on Thursday that one of the largest
government-backed companies, Dubai World, was attempting to reschedule its debt
repayments by at least six months, the facade came crumbling down. Unable to
refinance an Islamic bond due to mature in mid-December, Dubai chose to release
its devastating news on the eve of Thanksgiving and Eid al-Adha in a last-ditch
attempt to win more breathing space. Clearly, Dubai's leaders had hoped to buy
just enough time to paper over the gaping holes that will have to be plugged in
the emirate's economy over the next few months.

Having failed to entice more than $2bn from international
investors, all hopes were pinned on oil-rich Abu Dhabi, which had already
provided Dubai with $10bn early this year. However, when further assistance
came last week in the form of a $5bn loan, it was evident that strict strings
were attached. This time, the funds could only be used to pay off disgruntled
foreign contractors, rather than sunk into the yawning chasms created by
Dubai's big property companies. Abu Dhabi cannot afford to throw good money
after bad.

After a decade of economic diversification and the building
up of several non-oil sectors – including luxury tourism, property and giant
"free zones" for foreign companies – Dubai had created a seemingly
vibrant post-oil economy. Many bought into the dream, all in the hope of "flipping"
their investments for a premium and making an easy killing.

Lured by the spoils of rapidly accelerating house prices,
investors flocked to Dubai. I remember turning up to an off-plan property
launch to be greeted by queues snaking outside on to the street, with everyone
desperate to put down deposits on patches of sand that had not yet been built
on. Demand was so phenomenal that punters were given lottery-like tickets: if
their number came up they were entitled to go to a counter and hand over their
cash.

The greed flowed equally in the other direction too. The
developers, many of them government-backed, were announcing new projects on an
almost daily basis by 2006.
In some cases they were selling off-plan properties on
pieces of land they had not yet acquired. This unchecked and unregulated fiasco
has left thousands with little more than title deeds for stalled building sites
or substandard, hastily built constructions.

The ruling family is now in an extremely precarious
situation. It has been disingenuous with the public, and its time-honoured
legitimacy will face a huge test. For years, the ruler was happy to have a grey
line between the government and his personal wealth, but now the tables may be
turned.

Christopher M Davidson is the author of Dubai: The Vulnerability
of Success and Abu Dhabi: Oil and Beyond

Dubai is used to being admired. The attitude of many of its
foreign residents is to steer clear of trouble

and praise the liberalism and the opportunity offered by the
emirate.

By taking bold bets and capitalising on the misfortunes of
neighbours in a volatile Middle East, Dubai has accomplished no small feat. It
has made up for its dwindling oil reserves by developing a

diversified service economy and becoming a rare model of
success that other states in the Arab world

have been emulating. It has also worked assiduously to
create a Dubai brand. By building extravagant

landmarks, including the world's tallest building, Dubai is
the Middle East's most exciting destination.

So it is no surprise a book that analyses Dubai's
weaknesses, as well as its virtues, provoked

nervousness in the emirate and was under threat of being
banned. Dubai: The Vulnerability of

Success is written by Christopher -Davidson, a fellow at the
Institute for Middle Eastern and Islamic Studies at Durham University, and a
former assistant professor at Sheikh Zayed University in the United Arab
Emirates. A rare expert on the UAE, Davidson last month complained that Dubai bookstores
had been told not to sell his book. The national authorities responded by
insisting that it was cleared for distribution.

Davidson's book should be seen in Dubai as an important
contribution. The city-state has been

running fast and wild for years. Taking a pause to consider
the impact of its rapid growth is a healthy exercise. It is a pity the author
focuses mostly on the political risks in Dubai. The global financial crisis has
highlighted the city's economic vulnerability, given the high level of debt and
the opaqueness of its property market. To shore up confidence the -federal
government of the UAE last week took forceful
action, guaranteeing bank deposits and injecting capital into the system.

The book charts a fascinating history of an obscure part of
the Gulf, explaining the ability of the emirate to pursue economic
liberalisation without political reform. Ruler and ruled in Dubai have an unwritten
bargain, says the author, under which nationals leave government matters to the
ruling alMaktoum family but receive their fair share of opportunity and wealth.

But Davidson sends warning shots that signal the concerns of
local citizens. Strains in the ruling bargain have emerged, he argues, as
nationals find themselves a small minority in an unrecognisable city. Their
population, Davidson estimates, accounts for no more than 4 per cent of the
total (though the government puts the figure at more than double that).

Protecting national identity and Islamic values against the
intrusion of foreign culture has become a hot topic in Dubai over the past
year, as more and more foreigners have moved in.

"Dubai cannot be considered a cosmopolitan city,"
he writes. "Despite the government's efforts to create centres for
multicultural understanding . . . most ethnic groups prefer to remain distinct,
each with their own social networks, clubs and community centres." In its
present state, he adds, the emirate would seem unlikely to become a melting pot
comparable with other international cities.

Davidson tackles other sensitive subjects, including the
complex relationship between the emirates in the UAE federation, and the
rivalry between Dubai and Abu Dhabi. While both emirates like to project harmony
in their relations, Davidson outlines a tense history in which the federation
was undermined as Dubai fiercely guarded its autonomy. It was not until the
mid-1990s that a road linking the two cities was built, he points out.

Perhaps most irritating to the Dubai authorities is
Davidson's depiction of the more seedy side of thecity, where he says
smuggling, arms trading and prostitution are rife. Though the government has stepped
up efforts to curb illegal activity, including money laundering, the openness
of Dubai has been a magnet for legitimate business as well as illicit
activities

The author cites, but does not subscribe to, the conspiracy
theory of a deal between Dubai and alQaeda, allowing the emirate to remain off
the target list if the network can benefit from the city's openness and its
infrastructure. Even if such a deal exists, says Davidson, Dubai would not be immune
to the terrorist threat from a splinter group.

There is much in this book that Dubai prefers to ignore. But
as Davidson writes: "For the emirate to survive and to prosper as a truly modern
city, as a sophisticated 21st century city, and as a genuine player in the
global economy, the time has come to subject it to a more detailed level of
scrutiny and independent analysis."

The writer is the FT's Middle East editor

The Financial Times Limited 2008

The World is sinking: Dubai islands 'falling into the sea'

By Richard Spencer, Dubai9:30PM GMT 20 Jan 2011 / The
Telegraph

The islands were intended as the ultimate luxury possession,
even for Dubai.

But the World, the ambitiously-constructed archipelago of
islands shaped like the countries of the globe, is sinking back into the sea,
according to evidence cited before a property tribunal.

The islands were intended to be developed with tailor-made
hotel complexes and luxury villas, and sold to millionaires. They are off the
coast of Dubai and accessible by yacht or motor boat.

Now their sands are eroding and the navigational channels
between them are silting up, the British lawyer for a company bringing a case
against the state-run developer, Nakheel, has told judges.

"The islands are gradually falling back into the
sea," Richard Wilmot-Smith QC, for Penguin Marine, said. The evidence
showed "erosion and deterioration of The World islands", he added.

With all but one of the islands still uninhabited –
Greenland – and that one a showpiece owned by the ruler of Dubai, most of the
development plans have been brought to a crashing halt by the financial crisis.

Nakheel, the developer, was part of Dubai World, the
state-owned conglomerate that had to be bailed out of debts put at around $25
billion at the end of 2009. The Dubai World Tribunal was set up to hear cases
arising out of the restructuring and separation of the companies involved.

The low-lying islands represent a vague shape out to sea
when viewed from Dubai's beaches, but are visible by satellite or from the top
of the city's Burg Khalifa, the world's tallest building, which opened to the
public last year.

According to the company, 70 per cent of the World's 300
islands have been sold. Nakheel is also behind Dubai's famous Palm-shaped
offshore developments. Villas in the only one near completion, Palm Jumeirah,
were given to or bought by footballers including David Beckham and Michael
Owen.

Though few celebrity buyers were found for The World, it was
rumoured – or joked – that Brad Pitt and Angeline Jolie had considered
Ethiopia.

Many investors who did buy the islands proved unwilling or
unable to finance further work when Dubai's property prices halved in the space
of a year.

Some were hit by troubles elsewhere – the owner of the
company which bought Ireland for £24 million, John O'Dolan, committed suicide,
while the man who bought Britain for £43 million, Safi Qurashi, is serving
seven years in jail in Dubai after being accused of bouncing cheques.

The dispute being heard by the property tribunal involves
Penguin Marine, the company which bought the rights to provide boat travel to
the islands.

With little business, it is trying to exit the contract,
which involves paying an annual fee of just under £1 million to Nakheel.

Nahkeel say they will cash an advanced payment guarantee
worth just over £1 million if that happens.

Penguin claim that work on the islands has "effectively
stopped". Mr Wilmot-Smith described the project as "dead".

Graham Lovett, for Nakheel, said the project was not dead
but admitted it was "in a coma".

"This is a ten-year project which has slowed
down," he said. "This is a project which will be completed."

He said Penguin would make money eventually. "That's
the price Penguin makes to stay in the game," he said. "They have the
potential to earn millions."

The tribunal found for Nakheel on Thursday, saying it would
give full reasoning later.

A spokesman for Nakheel insisted the islands were not
sinking. "Our periodical monitoring survey over the past three years
didn't observe any substantial erosion that requires sand nourishment," a
statement said

Dubai was also helped by the Arab Spring, which sent
businessmen scurrying away from other "frontier markets"

Friday is all-you-can-eat buffet day in the Gulf, and on the
terrace of the creek-side Park Hyatt, overlooking the Yacht Club, the tables
are overflowing with red-faced Britons and Australians, quaffing champagne and
slurping down oysters.

In the evening, a procession of tipsy girls in high heels
totters out of the beach-side Barasti bar at the other end of town, falling
into taxis lined up to take them to the next party. Along the coast, containers
are piled up the quays of Jebel Ali port, the largest in the Middle East,
disgorging the wherewithal to keep the fun going. Figures next week are
expected to show the port's through-put beating its own record in 2012, as its
success as a regional hub, on top of insatiable demand in the home of
conspicuous consumption, proves a winning combination once again.

"There's huge consumption," says Mohammed
al-Muallem, UAE head of Dubai Ports World, when asked where it all goes in a
city of less than two million. "Just Google Dubai Duty Free," he
adds: that sounds cryptic, but doing so reveals turnover in the airport's shops
hit £1bn last year (5.9 billion dirhams), another record, knocking the sums
earned by big shops in London into a cocked hat.

All that stuff, the cameras, the Courvoisier and plastic
camels, has to be imported through Jebel Ali before it leaves the country again
from 25 miles
up the road.

This is not what was expected four years ago. At the eye of
the financial storm, Dubai was predicted to sink beneath the Gulf's waves, the
desert to reconquer its malls and villas. "The dunes will reclaim the
soaring folly of Dubai," one columnist wrote, as property prices halved
and expatriates left their cars at the airport.

The emirate was bailed out with $10bn by its oil-rich
neighbour, Abu Dhabi, and still had to reschedule its debts with the banks.
Flaws in its state-led development model were exposed: the biggest debtor was
Dubai World, a state company, along with its Nakheel property subsidiary, the
builder of "castles in the sand" such as the celebrated Palm Islands.

But something odd happened. Disaster never struck. Although
the cranes fell silent over miles of property developments, headline projects
continued to open: a new Metro system, in September 2009; Burj Khalifa, the
world's tallest building, the following January; this month, perhaps of greater
importance than either, a new $3bn terminal at Dubai airport, built to handle
A380 superjumbos. Emirates Airlines has bought 90, and is already operating 31.

To say that the new terminal is a sign that "Dubai is
back" is not really right – airport passenger numbers kept growing
throughout the slump. But it is a good marker of confidence that the worst of
Dubai's troubles are behind it.

"We got comfy with Dubai about a year ago," said
Simon Williams, chief economist for HSBC Middle East. "We felt that the
cycle had turned again. It had worked through enough of its problems."

Mr Williams was always a Dubai optimist, even at its nadir,
but even some bears are being persuaded. Saud Masud, a former analyst with UBS
in Dubai, used to fear it would become locked in a deflationary spiral of
falling population - 90pc is expatriate - and falling GDP as the bubble
reversed.

He still sees major problems in the property sector, but
says refinancing the debt is no longer a concern. "They are going to grow
GDP at low single digit rates, but that's twice the global average," he
said.

That's down from the heady years of the mid-noughties, but
as Mr Masud said: "It had better continue growing at that rate. If it were
growing at 8pc there would be red flags everywhere."

What has recovered is "Mark One" Dubai, Dubai
before the Palms. That means Dubai as a transport hub: 50pc of Dubai Ports
trade is destined for the rest of the Gulf, the Middle East, or increasingly
Africa; Dubai as a regional base for western companies, whose employees prefer
the lifestyle to the alcohol-free strictures of Riyadh; and Dubai as a popular
tourism destination not just for bling-loving Britons but the even more
bling-loving Russians and Chinese too.

Tim Clark, president of Emirates Airlines, Dubai's most
recognisable business, says the economy had in parts diverted from its original
business model. But, he adds, so did three quarters of the world, and in
hindsight, Dubai's hangover, so devastating at the time, was dwarfed by what
happened elsewhere.

Dubai was also helped by the Arab Spring, which sent
businessmen scurrying away from other "frontier markets". "We
had a big influx, and some of that remains here, putting children into the
schools, and that has revitalised the service side of the economy," Mr
Clark said.

Even before this month's 2012 figures, Dubai's port was
pretty much full: Jebel Ali is extending its second terminal this year, and
opening a new one in 2014, bringing it from 14 to 19 million TEU capacity, in
the standard measuring unit. In 2011, it handled 13 million; before the crash,
11.8 million. That fell by six per cent in 2009, but more than rebounded the
following year.

Critics, of whom there are many, point out that none of this
makes Dubai a nicer place than when many visitors found it hard to know whether
to be appalled more by its excess or its autocracy. In some ways things are
worse –the UAE's hereditary rulers have detained scores of political activists,
afraid of Arab Spring spillover.

Even bling is not quite dead. In the last few weeks, some
developers have brushed off old, eye-catching plans - replicas of the Taj
Majal, new canal-side villa properties (first - build the canal). On closer
inspection, few details are revealed, particularly of financing. That seems
crazy, with much property still empty from last time round. But with GDP rising
and hotels full, the burned speculators of last time round seem a far-off
worry.

It is hard on those who were fleeced before - but there are
advantages as well as disadvantages in relying on a fickle expatriates: they
tend to go home when the going gets tough, rather than stage protests. And
those who stay - well, they just carry on lunching